ANALYSIS: Ryanair fleet order could rekindle eastern focus

Ryanair chief executive Michael O'Leary says that the airline's long-awaited order for 175 Boeing 737-800s will enable continued expansion across its core markets in Europe. Just 75 units will be deployed as replacement aircraft for the 305-strong fleet, he insists, with the rest being used to "drive new growth". A yet-to-be-concluded deal for 100 additional 737 Max aircraft could then pave the way for subsequent fleet renewal after 2017.

But Ryanair's well-established dominance on the continent coupled with a tougher pricing environment for new orders has made continued growth harder to justify - particularly given its traditional strategy of grounding large numbers of aircraft during the winter.

"A lot of their routes are already hitting diminishing returns," notes Patrick Edmond, managing director of Dublin-based E2consult. "They already flex their fleet between summer and winter to a higher degree than any other airline. So while they can add a certain amount of incremental capacity across the existing network [through higher frequencies], it needs to be a bit more transformational than that."

Two main spheres offer growth prospects for Ryanair's network. The first is the "vacuum" that would be created if another of Europe's troubled network carriers should collapse. However, Edmond says that competitors like Norwegian and Wizz Air are spying those same opportunities, so any large-scale failures on the continent could result in a "feeding frenzy".

The other significant opportunity is expansion into new markets outside of Europe - namely Russia, central Asia, the Persian Gulf and North Africa.

O'Leary has in the past downplayed Ryanair's interest in the under-served Russian market, saying "we haven't been too impressed" with plans to reform domestic regulations and bilateral restrictions. But the airline confirmed its commitment to North Africa in January, when it announced the placement of three aircraft at the Moroccan cities of Fez and Marrakech - Ryanair's first non-European operating bases.

Ryanair routes out of Morocco

"What Ryanair look for is locations where they can essentially create their own market, where either there are high-cost incumbents or no incumbents" Edmond explains. "So it's logical that they would now look to eastern Europe, and also potentially Israel and some parts of the Middle East."

The challenges for Ryanair entering such markets are immense. Although Russian transport minister Maxim Sokolov is a supporter of liberalisation, O'Leary is right to complain about the pace of reform. The collapse of Moscow-based Avianova in late 2011 underscores how legislation protecting passenger rights and restricting airfare pricing policies has disrupted no-frills models. Monopolistic ground handling and fuel services also pose problems.

But it is the accelerating competitive threat which provides the most compelling reason for Ryanair to deploy its new aircraft beyond Europe's borders, or else risk losing market share in what could become the dominant growth story of future decades.

Middle Eastern low-cost carriers FlyDubai and Air Arabia continue to expand rapidly in eastern Europe and the Commonwealth of Independent States (CIS), bolstering trade and labour links with former Soviet republics. The latter's Casablanca-based subsidiary, Air Arabia Maroc, also flies straight into the heart of western Europe.

A more direct threat is posed by Ryanair's main European rival, Wizz Air, which has set its gaze firmly eastward. The airline in April announced the launch of four new routes to Dubai in the United Arab Emirates, as well as a new connection with Baku, Azerbaijan. It already serves Kutaisi in Georgia and Tel Aviv in Israel from its bases in Poland and Hungary. Wizz Air further operates a Ukrainian subsidiary out of Kiev, and it is in the early stages of talks with Moscow about a Russian subsidiary.

Wizz Air routes out of Ukraine

However, while Ryanair is thought to be exploring new opportunities in eastern Europe, flying to Middle Eastern and CIS countries from existing bases in the West is more problematic. "I wouldn't rule out the possibility that Ryanair would go to the Gulf," Edmond begins. "They might find some opportunities to do extra-utilisation overnight flights. But Wizz is geographically better situated."

To that end, he says a takeover of Wizz Air might be the preferred route for Ryanair to expand beyond its core markets. "It would be a relatively straightforward way to suddenly establish their dominance through eastern Europe," he says. The airline's €3.15 billion ($4.14 billion) cash-pile would certainly facilitate such a move. But competition regulators could object, and the latest fleet order will anyhow make a serious dent in its reserves.

CTAIRA analyst Chris Tarry says that in 2002, when Ryanair placed its previous order for 100 737-800s, "nobody else was buying aeroplanes, and they were able to get an exceptional deal". This gave the airline an "almost unassailable cost advantage" against its competitors. The airline typically sought to dispose of the assets before their first major D-check.

In subsequent years, however, its fleet size consistently overshot management's own projections, suggesting that Ryanair was struggling to find buyers for its older aircraft. Operating an ageing fleet has in turn driven up costs, which was a contributing factor in the muted route expansion of recent times. "Ryanair's very clear focus has been on driving its average fares up," Tarry stresses. "To get the breakeven load factor down it has to get higher average revenue."

The airline's ability to expand operations with its latest order therefore hinges not just on the availability of new markets, but also the pricing agreed with Boeing. Whereas grounding aircraft over the winter is viable in a low fixed-cost environment, it becomes harder to justify as underlying costs associated with each individual unit climb.

"The only people who know what price Ryanair got are Ryanair, Boeing and their lawyers," Tarry concludes. "Ryanair still has the opportunity to grow, but they're also going to benefit from keeping their fleet age low. Looking at the cost of ownership, it makes clear sense to replace their aeroplanes."